Economics 101: Kelly

Fall 2000

Review List for Course through Second Midterm

Background:

What is Economics?

Definition and Overview

Positive versus Normative Economics

Plotting functions

Finding the slope and intercept of a linear function

Solving two equations in two unknowns

Data Types

Allocation of Resources:

Scarcity

Opportunity cost

Production possibility frontier

Interpreting the slope of the PPF

The law of increasing opportunity cost (causes and implications)

Things that shift the PPF out

Absolute and comparative advantage

The economic question (resource allocation)

Demand and Supply:

Demand versus quantity demanded

Shifts of the demand curve versus movements along the demand curve

Determinants of demand

The law of demand

Market demand as horizontal summation of the individual demand curves

Normal versus inferior goods

Complements versus substitutes

Supply versus quantity supplied

Shifts of the supply curve versus movements along the supply curve

Determinants of supply

The law of supply

Market supply as horizontal summation of individual supply curves

Equilibrium

Finding the equilibrium

Excess demand: shortage

Excess supply: surplus

Price ceiling

Price floor

Indeterminancy

Agricultural markets

Price support

Price subsidy

Soil bank

Consumer surplus

Producer surplus

Effects of taxes (excise tax)

Consumer tax incidence

Producer tax incidence

Deadweight loss

Elasticity

Elasticity of demand: (%change in the quantity demanded / % change in price)

Arc Elasticity of demand formula

Point elasticity of demand formula

Income elasticity of demand: (% change in the quantity demanded / % change in

income)

Inferior goods: income elasticity less than zero

Normal goods: income elasticity greater than zero

Cross-price elasticity of demand: (% change in the quantity demanded of good A/

% change in the price of good B)

Substitutes: cross-price elasticity greater than zero

Complements: cross-price elasticity less than zero

Elasticity of supply: (% change in the quantity supplied / % change in price)

Total Revenue and elasticity

P increases, TR increases, demand is inelastic

P increases, TR decreases, demand is elastic

P increases, TR remains the same, demand is unit elastic

P decreases, TR decreases, demand is inelastic

P decreases, TR increases, demand is elastic

P decreases, TR remains the same, demand is unit elastic

Consumer Theory

Total utility

Marginal utility

Diamond/water paradox

Cardinal and ordinal utility

MU of good X/price of good X = MU of good Y/price of good Y

Diminishing marginal utility

Goal of consumer: maximize utility subject to the constraint of income and prices

Indifference curves

Properties of indifference curves

Slope of indifference curves = MRS of good X for good Y = MU of good X/MU

Of good Y

Budget Constraint: income = (price of good X)(Quantity of good X) + (price of

Good Y)(quantity of good Y)

y-intercept: income/price of good Y

slope = -price of good X/price of good Y

Maximization of consumer’s utility

Effect of changes in income on consumer’s budget line

Income-consumption line

Effect of changes in prices on consumer’s budget line

Price-consumption line

Income and substitution effects

Normal and inferior goods using indifference curves

Derivation of demand curves